Last Monday, Oracle Corporation announced that it will buy Customer Relationship Management (CRM) vendor Siebel Systems in a cash and stock agreement valued at $5.85 billion. While industry observers had long predicted that a combination between the two firms might take place, the announcement still sent shock waves through the IT community. If the agreement clears any hurdles that investors and government agencies put in its way--which it almost certainly will--its impact on the enterprise application marketplace will be substantial.
Under the terms of the agreement, Siebel shareholders will receive $10.66 per share but can elect to exchange up to 30% of their shares for Oracle's common stock. While Oracle will spend $5.85 billion for the acquisition, its effective cost will be only $3.61 billion because Siebel has $2.24 billion of cash on hand. Oracle expects that the transaction will close in early 2006.
By purchasing Siebel, Oracle will inherit the CRM vendor's 4,000 customers and 3.4 million users worldwide. Many of these customers are also Oracle customers, as the vendor's database is the most frequently used repository for Siebel data. Indeed, Oracle and Siebel stated that many of their joint customers have recommended a merger over the last year.
As this article goes to press, Oracle has not yet said how many Siebel employees it will retain. However, the company has stated that it will retain key personnel from Siebel's development, support, sales, and professional services staffs. These employees will be needed to ensure customer satisfaction and to prepare Siebel's applications for the pivotal role that they will play in Oracle's next-generation application platform known as Project Fusion.
As I explained in an earlier article, Project Fusion is Oracle's strategy for converging its applications with those it has acquired from PeopleSoft, JD Edwards, and Retek. To make such convergence possible, Oracle will transform the code from these product lines into Web Services that will run on the company's Fusion Middleware platform. Last week, Oracle stated that it will make Siebel's applications the "centerpiece" of Project Fusion's CRM capabilities. At the same time, Oracle assured customers who use its existing CRM solutions that it will continue to enhance their products over the next several years. In addition, current CRM customers will be able to upgrade to Fusion CRM once Oracle ships it.
A Game-Changing Move
By acquiring Siebel, Oracle will become the world's largest CRM vendor and be better positioned to capture revenues from the fastest-growing segment of the enterprise application market. Just as importantly for Oracle, the acquisition will give it access to hundreds of companies that use the applications of its archrival, SAP.
Based on statements made by Siebel and SAP executives over the years, I estimate that between 10% and 20% of Siebel's customers use SAP products. Over the last several years, SAP has tried to woo these customers away from Siebel to its own CRM offerings. By acquiring Siebel, Oracle could provide Siebel-SAP customers with an alternative to migrating off their Siebel applications. Instead, they could switch from SAP to Oracle for both their core business and CRM applications. Without Siebel under its wing, Oracle would have little to no chance of convincing these customers to migrate off SAP. Once it owns Siebel, however, Oracle increases its odds of success. Moreover, it improves its chances of luring Siebel customers away from other enterprise application vendors. Right now, vendors around the world are identifying which of their customers are Siebel users and wondering what Oracle might try to do to win them away.
While the Siebel acquisition will change the rules of the game for the software industry, it will also affect Oracle's customers. Among JD Edwards users who have made CRM investments, the Siebel acquisition will be something of a deja vu experience. When JD Edwards was an independent company back in 2000, it agreed to resell Siebel's applications and promote them as its CRM solution of choice. Over the next 18 months, however, fewer than 200 of JD Edwards' 6,000 customers bought Siebel solutions. The underwhelming response was due to the high cost of Siebel deployments--a major concern for the mid-size companies that make up the bulk of JD Edwards' user base--and Siebel's lack of support for IBM's iSeries server. These problems sent JD Edwards hunting for a CRM vendor it could acquire that would be a better fit for its customers. The company found that vendor when it bought YOUcentric in August 2001 and cancelled its agreement with Siebel. Ironically, Siebel announced support for the iSeries during the same month.
Since the Siebel code base will be the cornerstone of Oracle's future CRM offerings, JD Edwards customers who purchased Siebel years ago should enjoy relatively smooth upgrades to the Project Fusion CRM offering. By contrast, JD Edwards customers who have made heavy investments in YOUcentric software may have to make more adjustments when upgrading to Fusion. I do expect Oracle will continue to enhance the YOUcentric code base over the next two years and support it through at least 2013. Toward the end of this decade, however, users should expect Oracle to encourage them to upgrade to Fusion and its more Siebel-centric technologies and best practices.
There is one more way that Oracle's latest move could change the rules of the game for the software industry. By acquiring Siebel, the vendor will probably launch a wave of consolidation within the CRM industry. For too long, CRM vendors have offered products that require excessive time and money to integrate with other core business systems. To be truly effective, CRM systems should be tightly integrated with Enterprise Resource Planning (ERP) and Supply Chain Management (SCM) systems. Oracle's acquisition of Siebel signals that the IT industry will achieve such integration through acquisitions. As such, the days of most pure-play CRM vendors are probably numbered. If you are a customer of one of those vendors, you should consider what your options will be in a post-merger environment. If you don't, you could be in for a bumpy ride.